Starting a gas station can be a wonderful idea. People who think they can run their own gas station should first consider their personality, skills and talents. Small business owners need to be patient, detail-oriented, self-motivated and disciplined. A gas station brings in large amounts of money and expends large amounts of money. Therefore, an individual owner should be a good bookkeeper, mathematician, and a generally well-organized person.
Gas stations and convenience stores are a unique business. While most of the large convenience store chains are owned by large oil companies, several, like 7-Eleven, Inc, are purely retail companies. All the chains, however, are increasingly turning towards the franchisor/franchisee model. Sixty-two percent of convenience stores are owned by someone who has only one store! It’s a great business for individual entrepreneurs to break into. Buying a gas station has some complications that are unique to the industry, like the difficulty in accurately evaluating an existing gas station. It can be hard to buy or start a gas station, but they are relatively easy to run.
What you need
First, you need to choose a location and find a property. Finding a location with the necessary driver demand for fuel and convenience store items is probably the most vital step. Because of the high start-up costs and operating costs, gas stations require a high volume of sales, or it will necessarily fail. Second, you will need licenses and permits. File all mandatory paperwork at the local state agencies; local fire departments also have requirements with which you must comply. Third, you need to choose providers. Talk to as many oil company representatives as you can and compare rates. Depending on the local gas prices, you can already be reasonably sure what you’ll be able to charge per gallon of gas, so finding the absolute best deal on a provider can be a crucial step (you’ll also need to pay taxes on the fuel). Fourth, you need to decide whether to start an independent retail store or a franchise convenience store. If you choose franchise, be very wary of the franchise agreements, which often have high demands and high risk on the franchisee. Remember, the majority of your profit will come from convenience store sales and amenities sales. Carefully consider what type of convenience store and which convenience store products will be most successful in your neighborhood. Finally, write a business plan, or hire someone to write a business plan. A thorough business plan should include the following items in great detail:
- Description of services, products and amenities
- Analysis of local market, competition and target clientele
- Explanation of organization and management of the business
- Strategy for advertising and marketing
- Detailed financial plan with graphs, tables and charts
- Executive summary with mission statement and objectives
If you make a good business plan, with accurate estimations of start-up costs, operating expenses and income, you will have a very good sense of whether or not you will be successful. Here is a rough estimation, not based on actual figures, of the type and a rough guess at what each type of expense might cost:
- Legal — $2,000
- Insurance — $2,000
- State Permits — $3,000
- Gas Station Setup — $100,000
- Store Setup — $20,000
- Promotional Sign — $5,000
- Cash on-hand — $18,500
- Start-up Inventory — $10,000
- Building purchase — $150,000
In our current economic environment, it is much harder to get financing for a new or existing gas station than it used to be. Ten years ago, you could easily get an SBA secured loan with a 20% downpayment. Now, the SBA no longer lends on gas stations and banks may require anywhere from 30 to 50% downpayment. If you are buying an existing gas station, the seller may be willing to finance a percentage of the purchase price, in order to help you cover your downpayment. If you are starting from scratch, you may need to find a few personal investors.
Let’s pretend that you start a gas station in Minneapolis, Minnesota. In Minnesota, it is reasonable to expect to sell gas at around a 3% mark-up from the price you pay from your supplier. Also, it is reasonable to expect about $10 in income from every $4 that you spend on convenience store products. In a single year, a relatively busy gas station might bring in $2,000,000 from gas sales and $400,000 from convenience store products sales. They would have spent $1,940,000 on buying the gas and $160,000 on buying the products. They have $300,000 of profit. Now let’s examine operating expenses. Here is an example of annual operating expenses:
- Payroll (including your own salary) — $190,000
- Payroll taxes– $30,000
- Depreciation — $15,000
- Interest on loans — $20,000
- Utilities, Insurance — $10,000
- Other — $10,000
This equals $275,000 in operating expenses, leaving $25,000, which should probably be applied to the principal of the original loan. Notice that a small boost in convenience store sales would greatly boost the profits. In such a case, switching coffee or donut vendors might make a crucial difference. Also, regardless of the annual profits, there is great value in organizing your business well, keeping good records, neat books and happy customers and employees. A smooth running business with a stable customer base is very valuable to potential buyers, when it comes time to sell your business.
Limiting Personal Liability
Gas Leak & Spill Cleanup Liability
Because of the uncertainty inherent in any business venture, it is crucial that the business owners limit their personal liability. Gas station owners are bound by the EPA’s Financial Responsibility Regulation, which hold owners liable for cleanup of leaks and spills from their underground storage tanks. Most owners carry insurance for these, but these policies do not completely relieve owners of liability, so the best way to reduce liability is to keep the tanks well-maintained. If you are buying an existing gas station, beware of any ignored environmental issues that you are involving yourself in; you may inherit liability for them.
Customer Injury Liability
Gas stations also carry inherent threats of customer injury. Any injury to a customer or vehicle that is caused by the gas station’s negligence or violation of statute creates a dangerous liability on the gas station. There are insurance plans to protect you against some, but not all, liability for accidents on gas station premises, but the best way to protect yourself is to regularly inspect the premises for dangers, make timely repairs, and practice good housekeeping and maintenance, including proper warning signs.
Personal Financial Liability
Owners also need to consider protecting themselves from personal financial responsibility. It is important to keep your business expenses and liabilities separate from your own, so you will need to carefully consider which type of company you want to create to minimize your risk while maximizing your tax savings.
An experienced business attorney may be able to help you limit your liability in these situations.